By Nick Aziz

Wednesday, Jan 23rd, 2013 @ 11:45 am

"The electric car is not dead," GM's North America chief Mark Reuss said at the Automotive News World Congress last week. "We'll get there. We will see the day when we have an affordable electric car that offers 300 miles of range with all the comfort and utility of a conventional vehicle. We're talking about a transformation here. And transformation takes time."

Reuss is absolutely right. So how can GM's electric car strategy be so wrong?

When Steve Jobs first introduced the iPod in 2001, the $400 device was widely criticized by tech pundits for being too expensive, putting it out of reach of shoppers considering a $100 Sony Discman or a $200 Rio MP3 player. Despite its high price tag, however, the iPod offered a unique value proposition -- it featured far more capacity, better battery life, and faster data transfers than anything else on the market. It became a high-end niche product that eventually spawned less expensive models.

It was a similar story with the first cell phones -- most people couldn't afford one, but there was undeniable value there for those who could. Likewise for digital watches, home laser printers, and microwave ovens. As absurdly expensive as the first plasma TVs were, they were untouchable in terms of all the characteristics that make for a good television -- color reproduction, contrast, clarity, and form factor. The same can be said for the $20,000 4K-resolution TVs announced at CES this year.

This is a natural pattern for new technology -- it generally emerges at the high end and slowly moves down-market. This is usually true in the automobile business as well - think stability control, torque vectoring, blind spot warning, adaptive cruise control, and so on. But something very strange is going on with the emergence of electric vehicles. Most of the attention -- particularly from mainstream automakers -- has been on the low-end of the market. Even more perplexing is the fact that these entry-level economy cars are priced like midsize luxury cars.

Take the Chevrolet Volt for example. Based on the Cruze compact sedan, the Volt rides, handles, and has the interior capacity of a $17,000 car with a couple thousand dollars in additional options. Having driven a Volt, I can assure you it doesn't perform like a $40,000 car -- by any measure. It also lacks the amenities of the cars it's priced against (think Lexus ES 300h, BMW 328i, Acura TL). Even after the available discounts, it's simply not a good deal. To add insult to injury, taxpayer-funded GM loses money on every $40,000 Volt it sells.

Similar criticisms can be levied against the Nissan Leaf, which, on top of sharing most of the Volt's faults, has the additional distinction of confining its owner to a comfortable 30 mile radius. Not to be outdone, GM plans to launch its Spark EV in 2013, which is perhaps the worst value proposition yet. A $32,500 version of a $12,000 car, it will be the most overpriced EV ever made.

The question, then, is why are so many companies -- especially GM -- scrambling to release these grossly overpriced plug-in electric compact cars? Trying to shoehorn expensive electric vehicle technology into entry-level economy cars makes absolutely no sense, unless you think about it from the perspective of governments, who have inserted themselves into the EV equation by subsidizing the purchase every electric car to the tune of $7,500 to $10,000.

The eggheads at the EPA and Department of Energy are smart enough to know that the electrification of the automobile is inevitable -- eventually. Electric powertrains promise to be considerably more reliable than what's under the hood of traditional cars, and anyone who has driven a Tesla will tell you that nothing beats the electric driving experience. Filling up a 300-mile battery for $5 -- even at California energy prices -- is pretty appealing, too. Battery prices are on a slow but steady march toward affordability, and future breakthroughs could someday accelerate the pace. All of this bodes well for EVs in the long term. Rather than sitting back and watching the tide come in, governments have decided to try their hardest to make you believe that it wouldn't happen without them.

Currently, the only reasonable value proposition in the EV segment can be found at the top of the price spectrum, which is no doubt where electric car development would be focused for the next several years if it wasn't for government meddling. Without any rebates, the $92,000 Tesla Model S Signature might sound expensive, but if its 265-mile EPA range suits your lifestyle, it's a credible alternative -- in terms of performance, luxury, size, and styling -- to the $95,000 Mercedes-Benz CLS 63 AMG or BMW M6 Gran Coupe.

With so much money for EV subsidies coming from middle-class taxpayers, automakers find themselves obliged to attempt -- albeit in vain -- to create an everyman EV. It would be terrible optics for governments to subsidize electric cars if the only EVs on the market were high-end luxury cars like the Model S, even though such cars are the only EVs that make sense today.

What's more, this entire line of thinking is based on the false assumption that a few thousand EV sales can put downward pressure on batteries, the most expensive component of any electric car. The truth is, sales of Volts and Leafs won't do anything to affect the global price of lithium batteries. It would take massively higher sales numbers to put any more pressure on prices than is already being applied by the consumer electronics field. That will never happen with the current price of these vehicles, making the whole situation a classic catch-22. Tesla's Elon Musk has pointed to a "weak Moore's Law" whereby battery prices fall around 8 percent per year. Prices are already dropping pretty much as fast as manufacturing technology will allow, and there's plenty of demand from existing industries to drive that progress.

Tesla expects to be able to sell a 250-mile range sub-$45,000 entry-luxury sedan in 2016, an ambition that is supported by the math. If an electric rival to the BMW 335i or Mercedes C350 is possible in three years, we just might see a viable electric rival to the Chevy Malibu or Nissan Altima by 2020. By 2025, a purely electric Spark or Nissan Versa might make sense. It's still unclear when or how the charge time issue will be resolved, but there is a lot of a promising technology on the horizon.

Nissan is clearly becoming hesitant about its current EV strategy, openly admitting the Leaf's poor sales have been a disappointment. Ford is dithering on EVs, and Toyota is positioning itself to take losses on the Rav4 EV, offering $7,500 in manufacturer rebates in addition to the up to $10,000 in government subsidies (federal and state). Meanwhile, with its impressive next-generation hybrid tech (found in the RLX and NSX), Honda continues to be very conservative in its approach to electric propulsion, focusing on slowly transitioning to the technology as it begins to make financial sense. Granted, there's also the Fit EV, but Honda is only expecting to sell 2,000 of them over three years, in a bid to please bureaucrats back home in Japan and to comply with California's mandate that every carmaker must offer at least one zero-emissions model.

On the other hand, GM appears to be doubling down on its strategy, having announced yet another non-starter, the Cadillac ELR. While a real electric Cadillac -- think CTS-EV -- would have made sense as the original platform for Voltec technology, a $60,000 version of the already overpriced Volt does not. Does anyone really think Cadillac would have a Cruze-based model if it wasn't for this EV silliness?

While former GM executive Bob Lutz recently admitted it would have made more sense to build an electric Escalade than to make the Volt, the current GM leadership appears to be staying the course. Of all the automakers, GM's strategy is by far the most concerning due to the amount of public dollars involved. Taxpayers lost tens of billions of dollars on the GM bailout, and it seems very likely that the drag the Voltec program put on GM's balance sheet translated into a lower stock price at the time the Treasury sold it shares. Also taking into account the hundreds of millions of dollars lost by would-be Volt battery supplier A123, the "embedded subsidy" in every Volt is massive, and the U.S. federal government is actually considering increasing the per-car rebate to $10,000. At the same time, GM and its dealers are taking steps to widen their losses even more, by offering $299/month Volt leases in some markets. To put that into perspective, a lease on a $40,000 car would normally cost over $600/month. A 50% loss is hardly a business model.

In their never ending quest for relevance, the U.S. federal government, the Japanese government, California, and other mega bureaucracies have done what they do all too regularly -- distort the market and oversee the malinvestment of hundreds of millions of public and private dollars. Worst of all, when useful EVs are affordable to average people 10 to 12 years from now, they'll boastfully take the credit, and most people will probably believe them, setting the stage for the next big waste of your hard earned dollars.